2. Financial Accounting, Seventh Edition4
ACCRUAL
ACCOUNTING
CONCEPTS
Financial Accounting, Seventh Edition

3. Adjusting Entries for “Prepaid Expenses”
Illustration: Sierra Corporation purchased supplies costing $2,500 on October 5. Sierra recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand.
Oct. 31
Supplies Expense
1,500
Supplies
1,500
($2,500 – 1,000 = $1,500)
Illustration 4-6 (Partial)
LO 4 Prepare adjusting entries for deferrals.

4. Adjusting Entries for “Prepaid Expenses”
Illustration: On October 4, Sierra Corporation paid $600 for a one-year fire insurance policy. Coverage began on October 1. Sierra recorded the payment by increasing (debiting) Prepaid Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month.
Oct. 31
Insurance Expense 50
Prepaid Insurance 50
Illustration 4-7 (Partial)
LO 4 Prepare adjusting entries for deferrals.

5. Adjusting Entries for “Prepaid Expenses”
Depreciation
Buildings, equipment, and motor vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired.
Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset’s useful life.
Depreciation does not attempt to report the actual change in the value of the asset.
LO 4 Prepare adjusting entries for deferrals.

6. Adjusting Entries for “Prepaid Expenses”
Illustration: For Sierra Corporation, assume that depreciation on the office equipment is $480 a year, or $40 per month.
Oct. 31
Depreciation Expense 40
Accumulated Depreciation-Equipment 40
Illustration 4-8 (Partial)
LO 4 Prepare adjusting entries for deferrals.

7. Adjusting Entries for “Unearned Revenues”
Illustration: Sierra Corporation received $1,200 on October 2 from R. Knox for guide services for multi-day trips expected to be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial balance. From an evaluation of the service Sierra performed for Knox during October, the company determines that it has earned $400 in October.
Oct. 31
Unearned Service Revenue
400
Service Revenue
400
Illustration 4-12 (Partial)
LO 4 Prepare adjusting entries for deferrals.

8. Adjusting Entries for “Accrued Revenues”
Illustration: In October, Sierra Corporation performed guide services for $200 that were not billed to clients before October 31.
Oct. 31
Accounts Receivable
200
Service Revenue
200
Illustration 4-15
LO 5 Prepare adjusting entries for accruals.

9. Adjusting Entries for “Accrued Expenses”
Illustration: Sierra Corporation signed a three-month note payable in the amount of $5,000 on October 1. The note requires Sierra to pay interest at an annual rate of 12%.
Illustration 4-18
Oct. 31
Interest Expense 50
Interest Payable 50
Illustration 4-19 (Partial)
LO 5 Prepare adjusting entries for accruals.

10. Adjusting Entries for “Accrued Expenses”
Illustration: Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries at October 31 are $1,200 ($400 x 3 days).
Oct. 31
Salaries and Wages Expense
1,200
Salaries and Wages Payable
1,200
Illustration 4-21
LO 5 Prepare adjusting entries for accruals.

11. The Adjusted Trial Balance
Illustration 4-26
Adjusted trial balance
LO 6

12. Copyright
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